Estate Planning
Sustainable Civilization: From the Grass Roots Up Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8 Many of the financial paradigms we live under amount to smoke and mirrors. The predominant political, corporate, and personal perceptions are a short-lived child of extreme abuse of finite resources. You can indeed make millions on Wall Street, or any other speculative market. But compare the long-term general rise in securities with the long term general real cost of living increases. (NOT necessarily the figures in the official federal COLA basket.) INTRODUCTION In physical terms the key to relegating a major disaster to the status of a (hopefully) mild inconvenience is preparation. Assume and estimate the worst, plan and act ahead of the disaster. Preparations for a short-term situation generally focus on gathering a stockpile of essential items while the weather is good, so you’re not stuck racing to the store for bottles of water, food, and batteries at the same moment every one else is making the same panic run. Long term mitigation efforts eliminate some effect of a disaster, such as raising you home above expected flood water levels. Whether preparation or mitigation steps, you must first be aware early of what is coming, and pay attention to key indicators. The conditions for a hurricane build over a long period of time, and with modern information systems we can easily see the warning signs. There are those who heed the warnings and secure their home, or if it is going to become life threatening then “get out of Dodge.” There are always those who ignore every sign, and want someone else to “bail them out” after the fact. Consider though that the larger the disaster, the less likely there will be help. In the coming decades the mix of physical and financial crisis may be a socio-economic hurricane. Our fossil fuel dependent infrastructure and the population dependent on it has taken a long time to build up, but once it crosses some critical point and becomes a storm it is likely to rise to violent destruction quickly. Most nations have public debt, on and off the books, that significantly exceeds the ability of the economy to pay in any real terms, and the finances of most citizens tends to not be better. The peak oil, essentially the overpopulation hurricane, is going to include not only physical problems, but financial, and it will be a transitional not temporary situation. Why do costs rise? Some claim cost increases are part of a normal, healthy and growing economy; as the demand for materials, employees, and goods & services rises. Large deficits (public and private) breed inflation. Public bailout of bad private debt, such as the 2007 proposed sub-prime mortgage bailout, drag down anyone making personal effort, and make the bigger picture worse. Consider essentially two aspects to increasing prices. Government debasing the currency is a stealth tax and a source of overall price increases. Increased demand (per person, or in the number of people expressing demand) or a falling supply (fruit shortages) may cause isolated or overall price increases. At this writing (2007) oil is the largest single component of supply side inflation trends, with the enhancing challenges of continuing global population increase and expanding industrialization on the demand side. PROBLEMS VISIBILE AND NOT David M. Walker, appointed by President Clinton as the Comptroller General of the United States, has repeatedly documented evidence that we face a dangerous financial future. Reports at the Comptroller website estimate the “off the books” debt to be around $40 trillion. In SEP 07 Congress acted jointly to raise the "debt limit" (RECOGNIZED DEBT) by around $850 billion (9.5% - from $8.965 to $9.815 trillion), apparently in recognition that they would make no effort to stop increasing the debt, interest on which consumes perhaps 1/3 of every tax dollar. In the same month a headline indicated 2007 Medicare spending is expected to reach $330 billion. The U.S. official population is around 300 million. Therefore BEFORE the baby boomer generation becomes Medicare eligible, the cost BEFORE the baby-boomer generation retires therefore represents a cost per-person of $1,100 per year. The "real" situation is of course worse. In 2008 the leading edge of the post WWII "baby boom" generation is eligible for retirement under Social Security, potentially removing some of the highest paid (and highest tax paying) workers from the market, at the same time as SS expenditures rise sharply. This same wavefront becomes eligible for Medicare in 2011. Debt such as Social Security, government pensions, etc. are NOT included in the on the books debt. As taxpayers leave the rolls, the per taxpayer portion rises. One would therefore think that the LAST THING anyone in Congress or the President would be planning would be another new federal expense, or expanding any current expense. We need to be cutting federal spending like crazy, unless of course, there is no intent to ever actually pay the debt. In an interview with the Financial Times, Mr. Walker said he that “…THE FEDERAL GOVERNMENT’S FINANCIAL CONDITION AND FISCAL OUTLOOK ARE WORSE THAN MANY MAY UNDERSTAND.” If you are a taxpayer, expect Uncle Sam to reach deeper into your pocket. If Uncle can't get enough money, expect NEW and creative taxes, potentially developing into forfeitures (direct theft of property). If you are dependent on the government, for your own health and safety find some other means of support. In another interview, drawing parallels with the end of the Roman Empire, Mr. Walker warned there were “striking similarities” between America’s current situation and “the factors that brought down Rome,” including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government.” Perhaps the best we can hope for is the printing press, where all of the debt is "paid", but the currency is worthless. IN THAT SCENARIO, communities that have in place, or rapidly develop a localized "life support" infrastructure and economy, may avoid the worst of the collapse… A pro-active, or quickly self-rescuing community is likely to face though increased attention from the government, demanding expansion of "share the wealth" programs. Look at your estate, what you earn, what you do with what you earn, what you teach your children, what legacy you are going to leave to your children. Just as the right physical steps can avoid physical disaster, the right estate and financial planning efforts can avoid disaster in this realm. GETTING STARTED ON YOUR ESTATE AND FINANCIAL PLAN Once you are aware of essential micro and macro economic factors, and decide to take definitive steps, note it's never too soon, and (almost) never too late to develop your personal estate and financial plan. Professional Assistance - There are times when you just need professional assistance. But be aware of who you hire. Depending upon their primary business, and personal paradigms, your advisor or assistant may have concepts that differ greatly from yours. Ensure you are understood, and that the assistance you receive is in line with YOUR paradigms. Estate Planning - If you expect to have more than some token estate, you do not want to allow your estate to pass by intestacy. In the United States, if you do not write a will, each state will have a law which determines who gets what. Once you are in a coma, mentally incompetent, or physically incapable of handling your affairs or communicating your intentions, it's too late to act. If all of your affairs are truly simple, you may get by with completing a set of standardized forms. But if you make an error, once the document is needed, it's too late to fix it. Please be aware, even in the area of estate planning when dealing with licensed legal counsel, in general you get what you pay for. There are for example frequently free seminars on estate planning, that in the final analysis can be seen as "commercials" for living trusts. Trusts are discussed elsewhere in this legal assistance information series. While these can be valuable tools for your estate, not everyone needs such. If you attend a "free" seminar, be aware and expect a sales pitch. Financial Planning - If your finances are such that you are ready to move beyond the basics, you may want to contact a professional financial planner. Ideally, your financial planner is someone who is familiar with a wide range of financial products, and will be able to translate your goals into a recommended plan of action. In selecting someone to help guide your investments, it's important for you to understand the "business" that the person is actually in. If your "planner" is an insurance agent, or mutual fund salesperson, you should not be surprised if the proposed plan has a focus in the area of the product they sell on commission. While the government does regulate individuals in certain professions, such as attorneys, insurance agents, and those engaged in the recommendation or sale of securities, I do not find that Arizona licenses or regulates financial planners, so check the qualifications of your planner. There appear to be three nationwide certifications for planners. Certified Financial Planner - see http://www.cfp.net/learn/ Chartered Financial Consultant (ChFC) - see http://www.theamericancollege.edu/ Certified Public Accountant - Personal Financial Specialist - see http://pfp.aicpa.org/ Outside of certification from one of these organizations, the title financial planner is used by many in the finance industry. Whether or not certified, you may find planners working in a variety of manners. Fee Based Plan - In general, for a fee this type of planner will review with you your present status, what you goals are, and provide advice as to a timeline and types of investments to achieve your goals. They usually do not work for or have a commission arrangement with the insurance or investment firms they may recommend. In many cases, you may find such a planner will make broad suggestions, and decline to make specific recommendations for purchases. (see Investment Advisors) Commission Based - There are frequently advertisements for free estate or financial planning sessions, and you may obtain valuable information from these sessions. Please keep in mind though, that if the free training and planning session is being presented by an insurance agent, or agent for an investment sales firm, they have an obvious incentive to sell the product of their firm. Investment Advisors - Investment advisors can also generally be divided into fee only, and commission based. Investment advisors appear to be required to either be state or federally registered. Registration does not mean they are recommended, it simply means they are regulated. Fee for Advice Services - There are investment advisory books, newsletter, email, live phone notice, etc., that approach investment from probably any aspect you might consider, such as if you're into ecology, there are "green" specialists. Some may be able to show you they have a good track record, some may not. But of course, the fact that they did well in the past does not guarantee they will make the right decisions for the future. Many of these services will allow you the opportunity to "test drive" their program, with some time period during which you can cancel and receive a refund of the cost. Commission Based - This includes the stockbroker who calls with the hot tip, the agent for a mutual fund based investment entity, insurance agents, etc. While no such business should automatically be suspect, you must nevertheless keep in mind the conflict of interest the employee has in their natural bias toward the products of their own firm. Virtually every security that may be on the market via any particular specialty firm, is also available on the market for purchase by use of an account with a discount broker. Getting Started - But before you schedule a session with your selected planning professional, you need to take stock of your situation, so that you can properly inform your respective advisors. The U. S. Department of Labor has a guidebook available free online at: http://www.dol.gov/ebsa/pdf/nearretirement.pdf There is always the possibility that once the mystery is removed from estate and financial planning terms and concepts that you will feel empowered to draft your own personal plan. Where Are You Now - Organize information on where you stand at the moment. Gather information relevant to your benefits, such as from Social Security, and your employment benefits while working and in retirement. Where Do You Go From Here - Where is it you want your plan to take you? If you are planning to leave a legacy for your children, you will probably find you plan will differ significantly from one where you plan to retire and spend your remaining healthy years driving the country in a motor home. Timeline - Regularly advertised are home mortgages for 360 months, and finance for a new car for 72 months. How many months do you have to invest for college for your child, or to prepare for your retirement? Not to be morbid, but what do you believe is your prospective lifespan? If you have term life insurance, when does the coverage cost increase, or when does coverage end? How do the time periods relate to each other? If you start college savings when your child is born, you have 216 months to prepare for a large expense that is typically going to be paid out over a 48 months period. Do you have enough being set aside each month to meet your goal of providing this assistance? The timeline part of your planning notes can be a simple series of important anticipated events and ages of your family members, or it can be a detailed spreadsheet including present and/or future value formulas that provide insight as to prospective rates of return and monthly amounts needed to reach your goals. Planning Factors - Ongoing events "in the news" make it clear that you cannot make long term personal financial planning decisions "in a vacuum". You must keep up with news events, and be prepared to make changes in your investment allocations, and other plans. Lifespan - Information I find in financial planning websites indicates that someone who is 65 today has a 50% probability of living to age 85 or longer, therefore most couples should incorporate in their plan at least one spouse living to around age 90. Obviously, your individual estimate must include your health, your lifestyle, your family history, etc., but a great deal can happen in 25 years of retirement. Inflation and Price Increases - Look at inflation as an overall decrease in the value of currency, and price increases as changes in the price of some good or service that make is consume a greater percentage of your spending. Inflation can be somewhat neutralized by investing in a commodity that holds value. Price changes must be addressed by reduction in your demand or relative reduction in some other spending. Taxation - Tax law keeps evolving, as does macro and micro economic news. You must keep abreast of the news and determine how changes will affect your plans. For example, if Congress were to pass a bill making ROTH distributions taxable, you would probably want to withdraw your money before the effective date of such a new law. Medicare Drug Option - The prescription drug benefit took effect in 2006. See the introductory information online at: http://www.medicare.gov/MPDPF/Shared/Static/Resources.asp Under the plan, you must select an insurance provider. If you don’t have an income that exceeds $9,000, you get a break on insurance premiums and deductibles. If your income exceeds this, you start to pay. For discussion purposes say the plan you select costs $40 a month. Add in the $250.00 deductible, and before the plan pays for anything, it costs you $730.00 You then pay 25% of the annual cost for drugs over $250, and up to a limit of $2,250 in drug costs. YOU then must pay all drug costs over this amount, until you have paid out of your pocket each year $3,600, after which the plan would come back into play and pay for you up to 95% of the additional drug costs. This cycle repeats each year. If you have a federal health benefit that you can continue into retirement, compare its costs and benefits closely to this Medicare option. Employment Based Benefits - For military and civilian federal employees, there is a great deal of information available that describes your benefits during employment and into your retirement. You should make it a priority to obtain and carefully review that which applies to your particular situation, as early as possible. For example, for civilian employees, it appears that to carry your federal benefit health and life insurances into retirement, you must have had coverage in place for 5 years preceding your retirement date. Social Security - As discussed in more detail in a five page document on the topic, Social Security has the potential to become a significant issue in the coming decade. For planning purposes, please be aware that Social Security payments are neither a right, nor even a contracted for entitlement. They are simply a voluntary benefit provided to you by the government, which can be changed, means tested, or eliminated. ESTATE PLANNING BASIC CONCEPTS. Be realistic; when a person dies, disappears, or becomes incapable of handling their own affairs, certain matters have to be taken care of by somebody - lawyer or not - whether there's a Will, Trust, Power of Attorney or none. If you have been proactive and made decisions about how you what you affairs to be conducted, who will act, and most importantly, actually prepared and signed the documents, your wishes should essentially be followed. Why do you need an estate plan? Death. First, in death there is the funeral. Then, bills have to be paid; personal business and insurance matters must be concluded. Final personal income tax and inheritance tax returns must be filed, as well as a federal estate tax return, if necessary. The dwelling might have to be vacated. All sorts of property must be accounted for, secured, divided appropriately and formally transferred as required. None of these chores can be avoided. A certain amount of time -free or paid - is inevitably involved. Obviously, leaving all these details to an attorney can be expensive. Significant money can be saved if the Executor and heirs help. Incapacity. Even if you're not in a terminal condition, you may be so ill or injured that you may no longer physically, or mentally, be able to interact with those around you, or even be aware of your surroundings. In that situation, a Judge would need to appoint a "guardian" or "conservator", who would be someone selected by the Judge. The person appointed by the court may NOT be someone you would have wanted. It may be someone completely unaware of your wishes, who acts completely contrary to what you would want. Elements of the Estate Plan Will. Your will is the foundation of your estate plan. It is your final opportunity to tell the world what you want to have happen once you're gone. In it, you can indicate, "... everything else that I've not made specific arrangements for, should be taken care of by..." Durable Power of Attorney (POA). Short of your death, if you become incapable of handling your own affairs, you can designate in advance who should handle things for you by a Durable Power of Attorney (POA). In this document you, the "principal" give authority to your agent, your "attorney in fact" (who need not be a lawyer) to act on your behalf. The scope of the power can be specific - e.g., the purchase of a single real estate investment - or almost unlimited. You may want to split your designations, i.e. Child Care Power. If you are temporarily incapacitated, the person whom you want to take care of your children on a temporary basis may not necessarily be the one who they would live with if you were to die. Health Care Power. If you're not capable of making your own medical decisions, you can select someone to make them for your. Living Wills and Advance Medical Directives (AMDs). These provide general guidance to medical professionals, and are typically used where you have been diagnosed with a terminal condition, and you wish to avoid a protracted death. Whether you have signed an AMD or not - as long as you retain the capacity to make and express decisions for yourself, your consent must be obtained for your medical treatment. You remain solely and totally in control. If you have an AMD, it can be revoked or modified at any time, if you are still capable of doing so. Insurance. In the case of automobile (liability) insurance, it is required by law in most states. Otherwise insurance, which is essentially a complex gambling contract between you and the insurance company, has as a primary purpose financial protection. For those without extensive physical assets, life insurance is a way to purchase an immediate estate of substance. Health insurance can provide for coverage of delineated medical costs. Liability insurance provides coverage of damages you cause up to the agreed limits. Personal property insurance can pay for repair or replacement of your property if damaged or stolen. You need to examine your risks, determine the type and amount of coverage you need, and comparison shop for the best blend of rate, coverage details, and provider. Trusts. A trust is a means to separate and define ownership, control, and receipt of benefits from an asset. It can allow you or another to manage an asset, yet not have ownership such that it is part of your estate. Determine your present status. Manner of Title. The manner in which property is owned effects how title is transferred on death. Sole ownership. If you own something, in your name only, with no one else who has a "community property" interest, lien against it, etc., you can dispose of such property by a lifetime gift, transfer to a trust, or by your will. Joint tenancies with right of survivorship (JTWROS). If you die, "owning" property held in this legal format, you CANNOT leave your property to anyone by will. In JTWROS, when you die, your interest in the property "dies" with you, and it automatically becomes the sole property of the survivor. This type of ownership PRECLUDES estate tax planning with regard to that asset. (You can't fool the IRS...) You CAN sell you interest, or transfer it into a trust, which effectively changes it to Tenant in Common. Tenants in Common. Each person "owns" an equal share in the property, which can be sold, transferred in trust, or left in a will. This is a "default" position, which sneaks up on some people. For example, if you got divorced, even a long time ago, and an item of property was not covered by the divorce, then the law typically considers you to still be a tenant in common with your "ex". Community Property. In practice, this works a lot like "tenants in common", but it DOES NOT necessarily require that both names of a couple be on the title. Things can BE community property, jointly owned by both spouses, REGARDLESS of whose name it on the title. You CAN give or will away, or transfer in trust, your community property interest. Defined Beneficiaries. If you have a qualified retirement plan, Individual Retirement Account, Thrift Savings Plan, life insurance, etc. type of investment, where you are required to designate in writing a "beneficiary", this money goes directly to the beneficiary you specify. Direction to the contrary in a will, trust, etc. will be ignored. Gather Information. You will have a better grasp of your assets, obligations, etc. if you gather information on all of your property, accounts, etc. into one location, and prepare a summary. This could be an invaluable tool for someone seeking to keep up your bills while you were hospitalized, or in probating your estate. Estimate Estate Needs. If no one is or is likely to become dependent on you, if you're convinced you won't become incapacitated (or don't care if you do), and don't care what happens when you die, you don't need estate planning. Otherwise you should determine your obligations, likely risks, and the plan aspects touched on above that you would like in place. Summary. Planning your estate is an ongoing evolving process, requiring changes as you life changes. In separate articles we will provide further details on the aspects touched on above. Please though do not make any tax or estate planning decisions based solely on the brief outlines presented. Estate planning is but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals. Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8